QM Closing Limits Will Kill Profits, Midwest CEO Says

Jeff Schwalen, president/CEO at Hiway FCU, said profitability issues will force the Midwestern credit union to make non-QM mortgages.

BOSTON — The Consumer Financial Protection Bureau’s qualified mortgage rule that limits closing costs to 3% of the loan balance will have such a big impact on Midwestern credit unions, one Minnesota-based executive said he’d lose money if he complied.

Jeff Schwalen, president/CEO of the $918 million Hiway Federal Credit Union, presented the problem during an afternoon breakout session on new mortgage rules July 10 at NAFCU’s 46th Annual Conference here.

Schwalen said the 3% closing costs restriction won’t cover his costs for mortgage loans under $135,000. That’s a problem in Minnesota, where the average mortgage loan is just $180,000– Hiway FCU is headquartered in St. Paul–so he’s going to make non-QM loans.

For example, for a $50,000 mortgage loan, Schwalen said actual costs in Minnesota are $2,613. However, 3% of that balance is $1,500, resulting in a $1,113 net loss on the loan. A $135,000 mortgage would bring in a maximum of $4,050 in closing costs, but costs the credit union $75 more to make the loan.

In comparison, a $400,000 mortgage could generate up to $12,000 in closing costs and still comply with the qualified mortgage 3% closing costs limit. That would produce a $3,307 net profit for Hiway. However, mortgages of that size are more common on the coasts than in the Midwest, he said.

“So you can see how this percentage thing works to our disadvantage,” he said. “But, it’s an opening for us to fill that void in the marketplace.”

Hiway FCU books approximately $10 million in mortgage loans per month, and Schwalen said he currently holds about half of those loans on the books, and sells the other half to Fannie Mae. When the GSEs stop purchasing non-QM loans next year, Schwalen said he’ll hold the smaller dollar loans that aren’t qualified mortgages on his books because they will pose less interest rate risk.

Barry Stricklin, vice president of real estate lending for the $2.65 billion Tower Federal Credit Union of Laurel, Md., also spoke during the session. He agreed with Schwalen that non-QM loans present an opportunity for credit unions because they will represent about 25% of all mortgage loan production.

“I’ve heard Bank of America say they aren’t going to make any non-QM loans, and I hope they do that,” he said. “There is an opportunity here to fill that void. I’d encourage you to be part of that lending world that says you’ll do it. You shouldn’t be afraid to stand behind your underwriting.”

However, he also agreed with Schwalen that the decision to offer the loans hinges on interest rate risk and a credit union’s ability to effectively manage it on the balance sheet. Stricklin said Tower has created a matrix of real estate loan products that evaluates each in regard to how each will be affected by the new mortgage rules, whether or not they will be purchased by GSEs, and if not, the effect on interest rate risk to hold them on the balance sheet.

In response to a question from the audience regarding a potential private market for non-QM loans, Stricklin said that Raj Date, the former deputy director for the Consumer Financial Protection Bureau, is in the process of building a firm that will create a secondary market for the loans. And, he said, the GSEs may reverse or modify their decision to not purchase mortgages that don’t fall into the qualified mortgage category.

“It’s hard to say what they are going to do,” he said. “Twelve months from now, will they buy a 40-year loan? Because as rates go up, you’re going to reach a point where a 40-year product will be important for first time homebuyers, and they’ll face political pressure to support that. So you may see GSEs decide to buy them.”

However, he cautioned, credit unions can’t count on an accessible non-QM secondary market or a policy change from Fannie or Freddie.

“You have to be comfortable that if you’re putting something in portfolio, you can keep it there. Sure, you may be able to sell it down the road, but there’s no guarantee,” Stricklin said.

Once the matrix is complete, Stricklin said management should share the information with volunteers.

“If you’re going to start eliminating products, it will probably have to go to the board. And, even if you’re not going to eliminate anything, at a minimum at least present it to the board so they know what’s going on,” he said.

Rules that require new disclosures and additional statement requirements will make it impossible for credit unions that offer real estate loans to continue providing combined statements to members, Stricklin said.

That will mean additional costs, he said, but added that eSign Act rules can make the process less painful.

“What the CFPB decided is that these statements don’t have to comply with the eSign Act,” he said. “They will allow presumed consent, which means if a member has said they are okay with receiving statements electronically, you can assume they are also okay with getting these new statements electronically.”